By Larry Jones
August 7, 2006

The Conference of Mayors has joined forces with a broad coalition of government and business groups in Washington (DC) to urge repeal of Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109 – 222). This provision requires local governments that spend in excess of $100 million annually on goods and services, to withhold three percent of their payments to vendors and contractors who provide those goods and services. The requirement also applies to the federal as well as state governments, but not to the private sector. Although signed into law last May, the withholding requirement will not go into effect until January 1, 2011.

The withholding provision, which is expected to raise $7 billion over the next ten years, was slipped into the tax cut package at the last minute to offset the cost of providing tax cuts to businesses. The provision did not appear in either the House or Senate version of the bill and there were no hearings to examine its impact on the governments or the private sector. Government and business groups did not find out about the provision until after members had agreed on a final package.

Not only will this requirement drive up local governments’ administrative costs relative to collecting, remitting, accounting, recordkeeping and reporting, but it is expected to drive up their costs for goods and services since vendors and contractors will most likely increase the cost of government contracts to offset the three percent withholding. This will also put local governments at a competitive disadvantage with the private sector.

The Congressional Budget Office has determined that the provision would impose an unfunded mandate on state and local governments that exceeds the limit established in the Unfunded Mandate Reform Act ($62 million annually in 2006, adjusted for inflation).

The coalition, Government Withholding Relief Coalition, is working closely with Senator Larry E. Craig (ID), who introduced a bill (S. 2821) to repeal the withholding requirement shortly after the legislation was enacted. A spokesman for the Senator, Dan Whiting, said his main motivation is his objection to the tax increase. Since the withholding requirement is now law, there has been talk in Congress recently about raising the amount from three to four percent and moving up the implementation date. Some members view this as an easy way to raise revenue to pay for pet projects.

The coalition is meeting with members in the House to try to find a Representative who will sponsor a companion bill to S. 2821 to repeal the withholding requirement. Mayors, governors and other elected leaders are urged to talk to their Senators and Representatives and encourage them to support repeal legislation.